Ladies and gentlemen, thank you for standing by. I'm Emma, your Chorus Call operator. Welcome and thank you for joining the SAP 2015 Full Year Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead, sir.

Yes, thank you. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the fourth quarter 2015. I'm joined on the phone by our CEO, Bill McDermott; and here in Waldorf by our CFO, Luka Mucic. Both Bill and Luka will make opening remarks on the call today. Also joining us in Waldorf for Q&A are board members Rob Enslin, who runs Global Customer Operations; Bernd Leukert, who leads product innovation; and Steve Singh, Head of SAP Business Network. Before we get started, I would like to say a few words about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2014 filed with the SEC on March 20, 2015. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. I would also like to invite you to our Capital Markets Day, which will be held on February 4 in New York City. In addition, there will be other IR events in 2016 at CeBIT in Hanover, Germany on March 15 and [indiscernible] additional IR program at SAPPHIRE, Orlando on May 18. Furthermore, please keep in mind that unless otherwise noted, all numbers referred to on this conference call are non-IFRS, and growth rates are non-IFRS, as reported. And finally, as you know, Bill McDermott is joining us from Davos, so he's able to join the first 40 minutes of the call. And with that, I would like to turn the call over to Bill.

Thank you, Stefan. Hi, everyone. I'm joining you today, as Stefan said, from the 2016 World Economic Forum in Davos, Switzerland. Leaders have gathered here to address issues like expanding economic opportunity and winning the fight against cancer. This is a very fitting backdrop for our discussion about how SAP has extended our leadership in the business software industry, while also remaining ever driven to help the world run better and improve people's lives. As you'll recall, over the past 6 years, we set some audacious goals: to nearly double our revenue to EUR 20-plus billion by 2015, to reach EUR 2 billion revenue in the cloud, to become the cloud company powered by HANA and help customers Run Simple. So let's take a look at where we're at today. Total revenue close to EUR 21 billion, EUR 2.3 billion in cloud subscription revenue, operating profit up nearly 60% since 2010, and shareholder value doubled in 6 years. More than 95 million cloud users, we have the most cloud users in the business software industry, a customer base that has nearly tripled, now we're over 300,000 customers in 190 countries around the world. We achieved these results by focusing on our customers then setting the right strategy for SAP. Through organic innovation and strategic M&A, we have successfully executed on our strategy. Today, we see soaring adoption of S/4HANA and our completeness of vision in the cloud is driving significant market share gains against both core and narrowly focused cloud competitors. Let me give you just a couple of headlines. Record cloud and software revenue up 20%, decisively beating our full year guidance. We are one of the few companies that is growing both in the cloud and on-premise license revenues. Operating profit was up 13%, which also beats the…

Thank you very much, Bill, and indeed, we had a tremendous year and an even stronger fourth quarter in 2015. These results truly validate that our strategy is resonating very successfully across markets and industries with our unique combination of the growing core and at the same time, rapidly expanding cloud business. If you take a look at our performance versus outlook, we set ambitious targets for the full year 2015, and we over delivered with record 2015 cloud and software revenue growing by 12% in constant currencies and clearly beating our guidance. We also continued our fast growth in the cloud and achieved our guidance with EUR 2 billion in cloud subscriptions and support revenue at constant currencies. For operating profit, we exceeded the guidance range with EUR 5.903 billion at constant currencies. Briefly to our effective tax rates for the full year, in both our IFRS and non-IFRS effective tax rates, we came in actually better than expected in our guidance. We ended the year with an IFRS effective tax rate of 23.3% and a non-IFRS effective tax rate of 26 point -- 26 percentage points. Now let me talk about some of our key financial metrics in detail. First, the cloud. Cloud subscriptions and support revenue continued its fast growth in the fourth quarter, with an increase of 76% to EUR 633 million. For the full year, we grew by 109% to EUR 2.3 billion. Even without the Concur and Fieldglass contributions, we saw a strong organic growth outpacing most of our cloud competitors. Our new cloud bookings were up 75% to EUR 344 million in the fourth quarter and 103% to EUR 883 million year-over-year. It's important to note, Bill has said that, that new cloud bookings only shows a portion of our future cloud revenue.…

Yes, thank you, Luka. Just as a reminder, as you know, Bill McDermott is joining us from Davos, so he's able to join the first 40 minutes of this call, and I'd like to ask you to keep this in mind, then you ask your questions. And now I hand it back to our operator. Emma, you can start the Q&A session, please.

[Operator Instructions] The first question comes from the line of Phil Winslow of Credit Suisse.

A question for Bill, actually 2 questions. Wanted to focus on S/4HANA, because obviously you guys had a great sequential increase in customer count, more than doubling your quarter-to-quarter. The question here is do you think we've hit the inflection point, particularly with the release of 15 11 [ph] in November? I mean, that seems like a pretty significant, just milestone event for you guys. And then when you think of sort of S/4HANA going forward, I mean, you talked about 300,000 customers and yes, doubling the number of HANA customers quarter-to-quarter is a big deal. But if I look at that, call it 2,700 versus 300,000, it feels like we're in the early days here. Just wanted to get your take and then just have one quick follow-up to that.

Absolutely. Thank you very much, Phil. I appreciate it. We are in the early phases of an amazing cyclical innovation cycle on S/4HANA. If you talk to any CEO today, they want to have one version in the truth with their data. They want to run a live system strategy so they can access that data, and they want to have full visibility in the way they're running their company. We call this the digital boardroom. To bring that to life, where you're managing an end-to-end business from the supply chain, the way you make products, the way you bill people, the way you take care of your people, your customers, your extended business network, it's only possible to do this on S/4HANA. So this is the leadership product, the leadership platform in the entire industry, bar none, hard stop. And I believe when you look at the pipelines and the activity we have in the company right now, we're in the early stages but an exciting, exciting phase. We like to think that the great R/3 and the amazing work that Hasso Plattner and the founders did can actually be superseded by the innovation on S/4HANA, and that would be the biggest compliment we can pay to the heritage of SAP, and we intend to do that. I just got back from Singapore and China. If you look at China, they're very strategic, one belt, one road. And as they think about the Internet of Things and digitizing businesses and making smart cities and making smart factories, clearly, a product set like S/4HANA and what we've done in the cloud will be front and center in transforming the way China thinks about growth in the global economy. And in fact, I'm always quick to point out. This is a 12 trillion economy, in China, is the second largest market in the world and if it grows 6.5% this year, as some people might feel that's a little down, I remind them since I'm in Switzerland, the GDP that they'll increase in China is another Switzerland in a year. So it's still doing pretty well. And every conversation we had around S/4HANA was really inspiring with the SOEs or even private sector enterprises were very exciting.

Great. And then Bill, just one more follow-up on that, you're hitting the inflection point. Obviously, you guys are running a promotion around S/4HANA that you guys extended from the end of Q3 to end of the Q4. In terms -- one of the questions I'm getting from investors in terms of what -- sort of what drove that Q4 inflection point, how much of it was that 15 11 [ph] release in the enterprise management suite versus the end of that promotion? And specific to that promotion, how should we think about just the pricing going forward?

Yes. Thank you very much, Phil. So first of all, a promotion isn't going to sell the central nervous system of a company's strategy. And I think we did some reasonably good marketing to entice people to look more carefully at S/4HANA and create a sense of urgency around a promotion. But the heuristics of that promotion have been embodied in the pricing strategy that we took forward. It's not a promotion, but we were very thoughtful about what motivates customers to make the move and make the start on S/4HANA. In every case with that promotion incidentally, you obviously initiated a HANA license. You got 15% of the software value of the overall transaction and, of course, you get the recurring revenues on top of that, not to mention the upsell and the cross-sell. And what was interesting, we now are over 1,000 Employee Central customers with SuccessFactors. And when I started to talk to CEOs, and Rob and all of our executives out in the field and the board, it was quite interesting because why would you go with a proprietary database on a narrowly focused ACM application on a competitive alternative when you can get a better system uniquely integrated back into S/4 and HANA and you can run your people strategy and that extended into a Business Network and do all that in real time. So what's fascinating is the S/4HANA launch combined with some intelligent pricing and some good dialogue with the customer, actually initiated a lot of upsell and cross-sell and, therefore, it's only begun. So don't worry, dear shareholders, we have taken the heuristics from that pricing strategy, embodied it into the standard template of our pricing direction for 2016, and we don't intend to slow down.

Next question comes from the line of Adam Wood of Morgan Stanley.

I also wanted to dig in a little bit on S/4HANA. You obviously had the logistics release, as Phil mentioned in November. I wonder if you could give us a little bit of a feel for the road map as we look into 2016, what are the key milestones we should be thinking about in terms of releases and what are the key use cases you'll be delivering? And then maybe just a little bit longer term, Bill, you alluded to this being bigger than R/3 in terms of scale. Let me think about the available market or market opportunity for the product, whether this comes in, in licenses or subscriptions, how should we think about this? Is this something that could be bigger than R/3 in absolute value? And what's the time frame do you think for adoption of that?

So maybe I'll start off the answer and then, of course, we have the pleasure of having Bernd and Rob with us as well. So Bernd can touch on the product road map and Rob can give you some insight in terms of the customer receptivity and industries and geographies, and how the progress is going with the pipeline. But let me begin by saying, this question comes up a lot, and S/4HANA is not one of those narrowly focused cloud solutions that you can get out in Northern California, okay? This is like I am running a real-time enterprise here, and I want to run a best run business. So this is one of those longer-term initiatives when customers make that decision, and a lot of times, they're going to want to own that asset and capitalize it over a number of years. And we expect that is very consistent with the way R/3 played out in the market as well. So I don't think you should anticipate a reduction in the revenue that you will recognize from this in the short run, but I also do think the S/4 cloud edition as we hit the accelerator on that into 2016 and beyond is going to create a very nice upper mid-market and large enterprise, particularly noncustomer penetration where we would -- can really get some market share and really grow fast in that regard in the cloud. So that's another engine of growth you haven't even seen turned on yet. So that's kind of the picture on S/4HANA. And yes, in absolute terms, if you think about an installed base of over 300,000 customers, you have a lot of enterprises that will make the conversion. But don't forget, we have many net new customers on S/4HANA. More than 1/3 of our customers are brand new, net new, and many of them are competitive replacements of legacy competitors that you guys like to compare us to a lot. [indiscernible]

Thanks, Bill. And maybe just to add a little bit to the road map. Of course, the Q4 shipment 2015 was an inflection point in terms of completeness of the core product. However, just remember that we are market leader across 25 industries. And we have a tremendous portfolio, which we will add to our S/4HANA Core with industry-specific capabilities. And in addition to that, just reflecting the headline of Davos with the fourth Industrial Revolution, the talk the last couple of weeks and the last couple of days indicate that even in traditional areas like manufacturing, the impact of digital information will require a massive amount of innovation opportunities in order to have a digital core that is absolutely flexibly reacting to this new business models, to new processes and just the number of core innovation projects we have already running and where we generated already follow-up discussions the last couple of days shows that I do not see an end of a story of innovation with the digital core. It is rather the beginning of an amazing journey.

Next question comes from the line of Walter Pritchard of Citigroup.

A question for Luka. Just on the fiscal '17 ambition, just in terms of the change in composition versus where you were a year ago. I think recurring revenue down a bit implying license mix better, and your implied margins are a bit lower, and I guess we're used to seeing that when the license business is actually better than margins or stronger, and I'm just wondering if you could help talk us through the mix shift drivers there and the implications on the operating profit margin?

Yes. So first of all, you're absolutely right that we have obviously seen in 2015 a strong performance in our classical core business. And we are confident overall for our core business. Nevertheless, we have modeled our guidance in a way that we feel very confident and safe, so to say, in the sense of a prudent guidance in both directions. I think in terms of our revenue mix, clearly, we will see that cloud revenues are continuing to increase strongly. We have a CAGR ambition, as you say, at the high end, which is exceeding 30%. And we continue to believe that it's absolutely feasible, especially given the strong deferred and backlog that we have built over time. What that does is, of course, it makes margin expansion difficult while we continue to work on the efficiency of all of our business models in line with their individual capabilities. When you come to the correlation between the top line and our operating profit ambition, let's be clear. SAP, I think, is one of the very few, if not the only software technology companies that at the moment there is to give a confident and precise outlook for anything that is longer than just this business year. We are doing this with a very strong growth momentum, and we do it with a continued commitment to return value to our shareholders by increasing our operating profit. What we need to do, nevertheless, is cater for the needed flexibility and capability, to invest in order to make sure that the tremendous growth that we have been seeing in the cloud is actually delivered to and hopefully exceeding customer expectations. That means we need to build out the cloud infrastructure capabilities in order to service these customers as they're now on boarded.…

Next question comes from the line of Stacy Pollard of JPMorgan.

Just a cash flow question, actually. Can you explain a small thing. Can you explain the large decrease in trade receivables? And then for total free cash flow, what kind of number should we be looking for into 2016? And is there anything exceptional we should consider as we model that year?

Yes, absolutely. So first of all, for 2016, I think what you can expect in terms of free cash flow is that one of the biggest contributors against free cash flow will be gone in 2016, and that's basically the monetary outflow that we had from our restructuring program that was going on. We had to pay a lot of severances in 2015. As you will have seen and noted from our non-IFRS adjustments guidance, we expect that in 2016, as we had announced before, there will be no company-wide restructuring effort. Therefore, our restructuring obligations will be less than 1/10 at maximum of what we saw in 2015. And that, of course, will result in, let's say, a better free cash flow position. We -- I also expect that on the other non-IFRS adjustments and share-based payments, you have seen the guidance, it is in the slightly lower range than what we had seen in 2015. There might be a small effect there. But the big effect will be on restructuring. So I expect that cash flow in 2016 will trend upwards with the overall positive uptake of our business. In terms of the trade receivables, there is actually not really one particular thing that you can point to. Of course, we had normal movements of sales allowances and bad debt, which slightly trended up. But other than that, it's a normal seasonal movement that we have towards the end of the year. You actually collect a lot, especially in emerging markets in terms of maintenance, invoices and so on, which has been overdue for some time, and that's what you typically see happening. And so there is not a specific effect that I would like to point to.

Next question comes from the line of Gerardus Vos of Barclays.

Just firstly on the license. Now given the kind of strong uptake and momentum you've seen there, is there a reason to believe that you can't see some kind of mini revival of licenses with a bit of growth for the coming years? It looks that the implied level of guidance on the licenses is around flat, so that's 5% better than the soft guidance you gave a year or so ago. So I'm interested in your thoughts there. And then secondly, despite this better outlook for the core and for the licenses, the margin for 2017 is a reduction on 2015 -- 2016. So I was wondering if you could help me a little bit about the investments you plan 2 years out?

Robert, do you want to start on the assumptions for the license performance.

Yes, sure. So on the license performance, I think the way we look at the core business is that we're going to see an attractive core business, but we've also got to take the measures in the cloud and the movement to the cloud into effect. And so I think you see a reasonable guidance with strong opportunity in S/4 and a continued acceleration of the cloud business that we saw this year.

And then the second question on the investments and the implied margin for 2017?

Yes, investments, a couple of things. I mentioned already continued investments in cloud infrastructure that we will make. We want to make sure that we have a converged cloud infrastructure across all of our data centers, which will be increasing the efficiency of our cloud operations after we have completed that work. So it's definitely investment into a more profitable and better margin future. And secondly, we are in process of migrating our cloud solutions away from third-party databases to SAP's HANA platform. This is a work that will take a little while, up to 2 years, but then, at the end of the day, of course, it will also increase our efficiency in operations. We have our strategic priorities set. They are clear. S/4HANA will see a lot of investment in the future to complete the road map that Bernd has talked about before. We'll invest in HCM. We will invest in Customer Engagement and Commerce solutions. We will invest in the further build-out of our HANA Cloud Platform, so the usual suspects that you would assume. I think we did a good job over the past years to actually scale the effectiveness of our sales operations, the collaboration between the Business Network Group and our TCO organization is working very well. You might have taken away from our Q4 results in 2015 a significant increase in sales and marketing expenses, but that was really due to a catch-up in bonuses, as I said before. There's a lot of AEs due to the stellar Q4 performance hit their accelerators. If you back that out, actually we have seen a very good constant currency progression of sales and marketing expenses in line with the revenues. We will continue to invest in the further build-out of our sales force, that's for sure. But we really want to focus on innovation, creating the right solutions for the future as well as making sure that we succeed in the cloud. That's the primary investment areas that we have.

Your next question comes from the line of Michael Briest of UBS.

I guess sort of continuing on that theme, when you gave your 2020 vision a year ago, it sort of implied 1% to 5% annual decline in licenses. Obviously, 2015 was better than that, but 2016 guidance, as you said, is probably growth on licenses at the high end. I'm just wondering, are you perhaps surprised by the appetite for on premise. Obviously, S/4 is helping, but it does imply if we look out to 2020, 2018, 2019, 2020 have quite a sharp decline in licenses. Is that the way we should be thinking about things?

Yes, I think if you think about the guidance mechanics, that's obviously the conclusion to which you would come mathematically. Now when you set a guidance, you don't set it in line with hopes, but you set it with -- in line with needs -- with things that you really feel very confident about. I have to say, we believed when we launched S/4HANA that it could be a reinvigorator of growth in the core. And we have seen that the interest is tremendous. It was in line or even exceeding our hopes. But of course, it was not something that we could guarantee. I think for 2016 and '17, we have now a better feeling about that. We clearly see that we have started the product cycle that is meeting a lot of interest in the market. On the other hand, we have at the moment uncertainties in the macro environment. We clearly have areas of our portfolio that continue to migrate quickly towards the cloud, and this will continue to be the case. We're actually actively driving this like HR, like Customer Engagement and Commerce, like obviously our Business Network solutions and other areas. So I think it makes sense to be prudent, especially when you're thinking about such a long time frame out until 2020. And then let's see, but we are definitely confident about S/4HANA. That's a story that, I think, is coming across loud and clear. And, therefore, also in the fact that even on the 2020 targets, there is really a degree of certainty that has rather increased through the good results in 2015 than calling it into question.

Could I just follow-up on the cloud gross margins? You've explained pretty well on Q4, I think. Just looking at this year, obviously, there are the investments to be made, but we were seeing sequential improvements through the first 3 quarters last year. How would you expect margins to develop in the cloud this year?

Yes, definitely. I think it's a good question. I think the investments that we are making, as I said, they are necessary because we had strong growth in bookings. This should definitely level out. So I do not expect a gross margin erosion in 2016. I think you should plan for stability or a slight increase. I said after Q3 that you cannot expect to have such a big jump in gross margins as we have seen it in Q3 now to continue. But we are fully committed to our 80% gross margin long-term targets for the network as well as for public cloud and the 40% for the private cloud. That's the good news that you can also expect for 2016. We are very confident that HANA Enterprise Cloud will turn to positive gross margins in 2016 as we had predicted before and will improve steadily afterwards, which will, of course, also help despite the fact that the scale of the business is increasing. So I think stability to a slight increase in gross margins is what you can expect.

Next question comes from the line of Knut Woller of Baader Bank.

Just getting back on S/4HANA and with S/4HANA enterprise management, maybe a question for Bernd. In terms of functionality with S/4HANA enterprise management, how would you describe, i.e., on terms of functionality if we label everything as 100% now after the release of S/4HANA enterprise management and then with the new on-prem release expected to be released in Q4 this year, where should we be then at the end of this year with the new on-premise release for S/4HANA? Then in terms of live customers on S/4HANA, can you just provide us an update here where we were at the end of the year?

Yes, happy to do so. Maybe we start with the live customer first. That's an easier question. We had the ambitious goal of reaching close to 100 customers. And we reached that goal, and we are pretty happy about that product, which was just launched in February. Now having passed 100 live customers is a testimonial that it's not just a success in sales, it's a testimonial that the product is robust, it's mature. And as well, we are pretty happy as this is not in a dedicated segment. It's distributed across the whole cloud, across almost every industry. And this shows viability and maturities there, and this is then basically a good introduction to your second question. Where are we in terms of percentage of completion, and you asked about 100%. Just to make it clear, there is a hell of lot of functionality in our previous product, in ERP, which in the meantime is outdated or which we thought that we have not gotten the adoption which we expected a decade ago when we developed it. And we do not have the ambition and, therefore, it's not an official successor to offer each feature and function. Rather, what I said before, we want to extend the digital core and make it ready for the requirements of the future, which are, in many cases, different than what we had in the past. So not consider S/4HANA is just a technical modernization of something which we developed 2 decades ago. And Bill mentioned before cloud for analytics, mentioned the digital boardroom. So this is just one flavor where operational analytics and insights in the business will be incorporated into product. Another flavor is that we want to transfer a system of record into a real decision-making system where many decisions are automated as applications become more and more smart. Do not forget that we do not just have a traditional outdated database underneath S/4, we have a platform that has machine learning algorithms, that have a hell a lot of libraries, which enable our applications to be significantly smarter. And therefore, there is not a feature-by-feature comparison, and I can't give you a percentage. But what I can promise you is that, especially in industries, what I said before, we have a road map which we have published as well on our website. But as well, here, there are features which we will definitely deliver. And there are other features which even nobody is asking for these days. So hopefully, this gives a little bit more clarity, but as a summary, S/4 will be a significantly smarter product, much more decision support, reflecting the automation capabilities, modern software must-have, and I have not talked about -- at the moment about speech and voice recognition capabilities which we, of course, will incorporate into the product.

Final question comes from the line of John King of Bank of America Merrill Lynch.

I just thought I'd follow-up on the balance sheet side of things. So can you just update your comments around any potential M&A targets you might see out there of significant scale or whether you're sticking with primarily the organic strategy here? And I guess, the kind of follow-up to that is, if that's the case, obviously, to some extent, it's the board's decision around the dividend, but what would be the management view in terms of potentially raising the payout ratio in order to up the shareholder returns a little bit given the strong cash flow?

Yes, thank you very much for that question. So first of all, on M&A, our strategy is really unchanged. I mean, we have stated that previously. We don't see -- we don't foresee a need nor suitable targets for a bigger acquisition for the foreseeable future. Definitely, in the next 2 years, in 2016 and '17, our focus will be, as we had said before, on the repayment of debt. We have already progressed nicely in 2015, and we aim in 2016 and '17 to pay back roundabout EUR 1.6 billion each in bonds, but also in the repayment of the remaining Concur finance loan that are still outstanding. And then, of course, we will focus on organic innovation. And yes, we will also focus on making sure that shareholder returns are provided. SAP has a long history to pay a dividend. It has an established dividend policy, which formally states that more than 35% of net profits should be paid out to shareholders. Now we also know that in the last year, in 2015, so the 2014 dividend was higher than that. It was at 40% of net profits. And indeed, you say it correctly that right governance body to decide on the dividend proposal to the shareholders is our supervisory board meeting, which will take place in March, and we'll finally resolve this. But obviously, we had a great result in 2015. We outperformed virtually all of our guidance parameters, including the bottom line on non-IFRS side. Yes, of course, in IFRS results, this looks a little bit differently. But you can certainly be sure that we will propose something which also rewards the shareholders appropriately. That's about the maximum what I can state at this point. But don't worry.

Thank you very much. This concludes our fourth quarter 2015 financial analyst call. I will say thank you very much for joining, and we look forward to seeing you in New York on the 4th of February at our Capital Markets Day. Thank you very much, and goodbye.

Thank you.

Ladies and gentlemen, this concludes the SAP third quarter (sic) [ fourth quarter ] earnings call for today. Thank you for joining and goodbye.